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Cap and Trade System Pros and Cons

A Cap and trade program encourages a limit on potentially harmful greenhouse gas emissions by using economics and ecology. It imposes a cost on the emissions that businesses make into the environment, allowing for a decrease in pollution and producing financial gains that can support local and regional economies. There are several cap and trade system pros and cons to consider when looking at it as a political system.

The Pros of a cap and trade system are Pollution reduction, establishing a particular overall cap, Promoting ambitious climate change targets, Increase government revenue. The cons of the Cap and trade system are that It does not encourage some industries to change their behaviour, and Requires hard caps in order for it to function. There are several pros and cons of the cap and trade system to consider when looking at its positives and negatives.

Related article: Pros and cons of NAFTA

Pros of the cap and trade system:

Pollution reduction might be accelerated through trade:

According to Nathaniel Keohane, vice president for the global climate, cap, and trade allow the market to determine the most cost-effective strategy to reduce emissions. Companies that reduce their pollution levels more quickly can sell their allotment to other organization that pollutes more, giving them the chance to save it for later use.

It establishes a particular overall cap, which is subsequently divided into allowances:

The government sets a limit on how much output any company operating under a cap and trade system is allowed to generate. Although there is nothing in place to prevent the agencies from exceeding that amount, cap violators sometimes face fines. Some areas only offer their caps for auction, rather than giving them out for free.

Cap and trade promote ambitious climate change targets:

One of the major producers of greenhouse gases worldwide is china. With assistance from environmental defence funds, the government began the first stage of a national carbon market in 2017. It encompasses more than 2600 businesses that contribute to the over 258 million person economy. The emissions trading system in the European Union, which began in 2005, served as the model for the system, which is today the largest of its kind in the world.

Cap and trade increase government revenue:

A new stream of cash is established that may be used to fund infrastructure requirements, social programs, or national security since the government can choose to sell carbon credits to the highest bidder. The money may also be used to support expensive energy and new technologies that enable us to do more with fewer resources, despite the fact that detractors of this system would argue that these payments serve as an incentive to pollute. It may even be a means to start closing a state or federal budget deficit.

Cap and trade do away with the necessity for an additional economic tax:

A carbon tax is an alternative to a cap and trade system. When taxation is the preferred method used to reduce greenhouse emissions, then companies receive a specific charge for every ton of carbon dioxide they produce. While it merely promotes innovation by preventing additional expenses, monitoring methods would still be required to identify individual accountability.

It is a system that also offers customers more options:

Although there may be certain goods and services that experience a price increase when a cap and trade system is in place to control greenhouse gas emissions, customers also have another alternative accessible to them in this free market system. If a corporation determines that it will not comply with the conditions of the system, then customers can opt to do business with their competitors who are working to minimize their pollution levels. Those that attempt to game the system can also be avoided.

Related article: Free Trade Pros and Cons

Cons of the cap and trade system:

It does not encourage some industries to change their behaviour:

The fact that the cap and trade system would incentivize the sector most dependent on fossil fuel to maintain its polluting practices is one of its biggest drawbacks. With the help of this mechanism, it is feasible to buy carbon offsets or credits for a price that is lower than switching away from the fuels that cause greenhouse gas emissions in the first place. Because the needed price has little influence, there is no incentive to employ renewable energy sources or to be inventive.

Cap and trade systems can also encourage some companies to cheat:

Implementing a monitoring system that keeps tabs on greenhouse gas outputs from every firm is the only method to ensure compliance with a cap and trade system. The government is counting on the honor system to promote a decrease in climate change factors if there is no method to identify who is remaining within the bounds of the market. Although this structure can promote some compliance, it also encourages businesses to take advantage of the unfair system.

This system requires hard caps in order for it to function:

In a cap and trade system, agencies frequently ask for extensions or more room under the limit to retain their commercial prospects. For this system to function, the government must be strict in enforcing a cap on emissions. There is no use in having this framework in place if continual extensions are given to significant polluters.  The value of the trading mechanism will decrease as a result of ongoing program modifications that allow for more pollution, putting this alternative on the fast track to failure.

The government ultimately dictates how many credits are available:

In a cap and trade system, the government has the authority to retire credits whenever they see fit. If an auction mechanism wasn’t utilized, they might revoke credits once they were issued, preventing the organization from using them after they were received. Retaliatory politics have the potential to arise as a result of this drawback, particularly in countries with a two-party system like the united states.

Emissions credits can be artificially high or low:

Anyone who has the money to do so can choose to buy carbon credits since the cap and trade system is based on free market principles. That enables there anyone to hold them hostage against businesses who would need to use them in order to adhere to their legal framework. Since there would be fewer trades available on the market, it can also be a means to artificially alter the price of each trade. Even when conserving the environment is the eventual goal, creating artificial scarcity may raise the cost of everything in society.

There is no consistency available unless a global cap and trade system is available:

Cap and trade systems can only function globally if every nation takes part in initiatives that operate within the same framework and environment. The amount of greenhouse gas emissions that are released into the atmosphere each year may not change much if one country permits higher levels of pollution than another. Before attempting to limit the quantity of carbon dioxide generated, some cultures may choose to be extremely rigorous, while others may choose to be more lenient in order to secure greater compliance.

Thank you for reading this article. If you have any queries regarding our article on the Cap and trade system pros and cons then do comment in the comment section below.

Explore more information:

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  3. Pros and Cons of Globalization
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Divya Chauhan
Divya Chauhan is an expert writer with 10+ years of experience as a content writer. They specialize in making complex topics like IT, Health, and general topic easy to understand. Divya has written over thousands of articles to help people with their content. Prior to joining Way2benefits’s editorial team in 2020, Divya worked as a Professor of BCA college and freelancer blogger.